Question

Steve gifted shares in a public corporation to his fifteen-year-old son, Simon. The ACB of the shares was $10,000. During the year, Simon received $500 in dividends from the shares. Simon then sold the shares for $12,000. Which of the following is true for Steve and Simon? (1 mark)

a. Simon will have to claim the dividends on his tax return and Steve will have to recognize the capital gain on his tax return.
b. Steve will have to claim the dividends on his tax return and Simon will have to recognize the capital gain on his tax return.
c. Steve will have to claim the dividends and a capital gain on his tax return.
d. Simon will have to claim the dividends and a capital gain on his tax return

Answer 1

Steve will have to claim the dividends because he owned the shares when dividends were received, and Simon will have to recognize the capital gain when he sells the shares as the new owner is (b). Steve will have to claim the dividends on his tax return, and Simon will have to recognize the capital gain on his tax return.

Step-by-step explanation:

When Steve gifted the shares to his son Simon, the concept of the attribution rule came into play. According to this rule, any income generated from the gifted property is attributed back to the giver (Steve in this case) for tax purposes option b. Therefore, Steve is responsible for claiming the $500 in dividends on his tax return.

However, when Simon sells the gifted shares, he becomes the owner of the property, and any capital gain resulting from the sale is attributed to him. In this scenario, Simon will need to recognize the capital gain of $2,000 ($12,000 - $10,000) on his tax return.

This allocation of tax responsibilities aligns with the attribution rules governing gifts and subsequent transactions. It ensures that the person who earned the income (dividends) or incurred the capital gain (from the sale) is the one accountable for reporting it on their respective tax returns.